Electricity prices across Europe are surging, and it isn’t even winter yet. In the U.K., the price for baseload electricity hit £354 (US$491) per megawatt-hour (MWh) on Monday. That's 700% higher than the average price for the 2010-2020 decade. Intraday prices during peak demand times are even higher, reaching as much as £1,750 (US$2,425) per MWh.
The phenomenon is not just hitting Britain. On the Continent, Germany has seen its electricity rates doubled, now trading at above €100 (US$118) per MWh. France and the Netherlands are also seeing elevated charges. But, the winter freeze potential wouldn't be complete without a look at natural gas whose prices have tripled as of late.
This incredible jump in prices is very concerning for European consumers, especially because it is only September. What does that mean for the winter season? Unless the situation is rectified, consumers can anticipate paying even more exorbitant rates—with some possibly forced to go without heat and/or electricity.
The problem is not just the result of a lack of supply and high demand. Certain European policies designed to facilitate a transition to clean energy are exacerbating the situation.
That means that increasing energy supplies will not be sufficient to relieve soaring costs or the potential that rates will again rise precipitously with future events. But, there are other players to the party affecting the situation.
Here's a brief look at four such catalysts:
1. Low natural gas stocks
Stores of natural gas in Europe hit their lowest levels in years this August. This was attributed to a surge in demand as economies relaxed pandemic restrictions this summer.
During the pandemic, natural gas demand dropped, and producers cut output. They failed to increase production in preparation for a summer surge.
2. Russia cut natural gas flows to Europe
For reasons that are not yet clear, Russia cut its deliveries of natural gas to Europe in late August, reducing them even further in September. Some analysts have speculated that this was a deliberate move by Gazprom (MCX:GAZP), which owns the Nord Stream and Nord Stream II pipelines.
The Nord Stream delivers natural gas from Russia to Germany, which then distributes the commodity to other European countries. Nord Stream II is another such pipeline that has been built, but isn't yet operational.
The controversial Nord Stream II pipeline, which mirrors the first Nord Stream pipeline, is not yet in use due to European regulations. Some analysts think Gazprom is cutting gas supplies to Europe to raise the price of natural gas and pressure the European Union to allow Gazprom to start pumping natural gas through Nord Stream II.
According to Gazprom, the problem is that Europe’s sudden increase in natural gas demand coincided with already scheduled maintenance and preparations for the winter which it cannot delay. Gazprom says it has reduced natural gas flows to Europe in part because it is preparing for expected high demand this winter. Part of this preparation, they said, requires pumping gas into underground storage facilities.
3. Carbon permits push fossil fuel prices higher
Higher natural gas prices have pushed European utilities to switch to coal fired plants. However, European regulations stipulate that utilities must offset the higher carbon emissions from coal by buying more carbon permits, which are traded on the market.
Higher demand for carbon permits pushed up those prices, making coal just as expensive to burn as natural gas. This, in turn, increases the cost for the consumer.
4. North Sea wind stopped blowing
Britain’s particular electricity price crunch is exacerbated by its reliance on wind farms in the North Sea. The United Kingdom typically generates about one quarter of its power needs from these wind farms. But in September, the power generated from this wind has dropped to just 11%.
For investors, the European power crunch helped lift the share prices of liquified natural gas (LNG) companies, like U.S. exporter Cheniere Energy (NYSE:LNG). Commodities traders have seen the price of certain types of coal rise and natural gas prices in Europe, as mentioned earlier, are skyrocketing.
The EU carbon benchmark contract is also up and likely to remain elevated as long as Europe continues burning more coal to meet demand. Oil prices haven’t been significantly impacted by the power situation so far, as power plants have turned to coal rather than oil.
It is possible that Europe’s soaring electricity prices could even out by October when Russia resumes normal natural gas deliveries to Europe. A big help could come if the Nord Stream II pipeline starts operating. However, the fear of a natural gas shortage may keep electricity prices at higher-than-average levels all winter.
Acute situations like the one seen now will likely become more frequent and more intense in the coming months and years as countries across Europe move forward with plans to close coal and nuclear plants to meet climate change targets.
The current situation highlights the dangers for Europe of relying too heavily on unreliable renewable energy and Russian institutions that pursue their own interests over Europe’s. Even after this current situation is settled, these same problems could very easily return at some point.
